Wednesday, May 1, 2013

Ireland hit hard by spring slowdown; markets don't show it yet

It seems that the markets are discounting many of the risks that have plagued Ireland's economy in recent years. Ireland's stock market has significantly outpaced the S&P500 in the last few months - ISEQ is up 20% over the past year.

Source: Ycharts

The nation's sovereign bond yields, which are the lowest among the Eurozone "periphery" nations, are near multi-year lows. All is well in the Emerald Isle.

Ireland 10y government bond yield

But is this exuberance - particularly in government bonds - justified at this stage? After all, Ireland is still heavily dependent on its export sector, which has slowed this year with the decline in global demand (chart below). And a material deceleration in growth could potentially put a strain on the nation's fiscal situation.

Ireland's exports and imports (source: CSO)

With domestic demand remaining anemic, the slowdown in exports is quickly translating into weakness in the nation's manufacturing activity.
Markit: - The Irish manufacturing sector moved further into contractionary territory during April, with output and new orders each declining for the second month running amid signs of deteriorating economic conditions. Falling workloads in turn led firms to reduce employment and purchasing activity. Meanwhile, input cost inflationary pressures eased to the weakest in nine months.
Ireland Manufacturing PMI (source: Matkit)

In order to raise domestic demand, the unemployment needs to fall from its stubbornly high level of 14% and the banking system needs to heal. As the manufacturing sector struggles and Ireland's banks continue to undergo rapid deleveraging (chart below), the prospects for improved domestic demand in the near term are grim. Ireland remains highly vulnerable to fluctuations in global economic growth. With the spring slowdown upon us, its financial markets can't be immune either.

Source: Central Bank of Ireland
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